TEXT-Lloyds Banking Group announces asset protection deal

LONDON, March 7 (Reuters) - Following is the statement released by Lloyds Banking Group (LLOY.L) on Saturday about its involvement in a government asset protection scheme.

Lloyds Banking Group plc (Lloyds Banking Group or the Group) today announces its intention to participate in the Government's Asset Protection Scheme (the Scheme), substantially reducing its risk weighted assets and very significantly strengthening the Group's capital position. The Group has also agreed to replace the £4 billion of preference shares held by HM Treasury with new ordinary shares which will be offered to existing shareholders on a pre-emptive basis. Participation in the Scheme and the replacement of the preference shares is subject to, among other things, shareholder approval.

Eric Daniels, Group Chief Executive, Lloyds Banking Group, said: "Participating in the Government's Asset Protection Scheme substantially reduces the risk profile of the Group's balance sheet. Our significantly enhanced capital position will ensure that the Group can weather the severest of economic downturns and emerge strongly when the economy recovers. We believe that this is an appropriate deal for our shareholders." Details of the Scheme are set out in the press release issued by HM Treasury on 26 February 2009. The Group will continue working with HM Treasury to agree and finalise its accession to the Scheme. SCHEME AMOUNT

The Group intends to participate in the Scheme in respect of assets and exposures (Covered Assets) on its balance sheet with an aggregate par value of approximately £260 billion (expected to be approximately £250 billion net of December 2008 impairment provisions and writedowns). The Covered Assets are expected to include residential mortgages (c.£74 billion), unsecured personal loans (c.£18 billion), corporate and commercial loans (including commercial real estate and leveraged finance loans) (c.£151 billion) and treasury assets (including the Group's Alt-A portfolio) (c.£17 billion).

It is expected that approximately 83 per cent of the Covered Assets will come from HBOS legacy lending books and the balance from Lloyds TSB legacy books. FIRST LOSS

The Group will bear a first loss amount in respect of the Covered Assets. The amount of the first loss will be up to £25 billion ((after taking into account historic impairments and writedowns).

After the first loss, the Group will retain an exposure of 10 per cent of any further losses incurred in respect of the Covered Assets. The remaining 90 per cent of further losses arising in respect of the Covered Assets will be borne by HM Treasury. The Scheme will apply to losses incurred in respect of assets and exposures on the balance sheet as at 31 December 2008, regardless of when such losses are incurred. FEE AND RELATED ISSUANCE OF CAPITAL

Upon accession to the Scheme, the Group will pay a fee to HM Treasury of £15.6 billion. This fee will be amortised over an estimated 7 year period. The proceeds of this fee will be applied by HM Treasury in subscribing for an issue by Lloyds Banking Group plc of B Shares, carrying a dividend of the greater of 7 per cent per annum and 125 per cent of the dividend on ordinary shares.The B Shares will constitute core tier 1 capital. A summary of the expected terms of the B Shares is set out in Appendix 1. The overall cost to the Group of participating in the Scheme, as a percentage of the reduction in risk-weighted assets, totals 20.9 per cent.

The B Shares, which are non-voting, are convertible at any time at the holder's option into ordinary shares in Lloyds Banking Group plc at a price of 115 pence per ordinary share, and are mandatorily convertible into ordinary shares at that price if the volume weighted average trading price of the ordinary shares for 20 trading days in any 30 trading day period equals or exceeds 150 pence.

The Group has not entered into any agreement to restrict the utilisation of any existing or future UK tax losses or allowances

. CAPITAL RESTRUCTURING - REPLACEMENT OF EXISTING PREFERENCE SHARES

The Group has today agreed with HM Treasury that on implementation of the Asset Protection Scheme the £4 billion of preference shares HM Treasury holds (together with accrued dividends) will be replaced with new ordinary shares. Eligible Lloyds Banking Group plc ordinary shareholders (Shareholders) will be able to apply to subscribe for approximately £4 billion of new ordinary shares pro rata to their existing shareholdings at a fixed price of 38.43 pence per share. This represents an 8.5 per cent discount to the closing price on 6 March 2009. These new ordinary shares will be offered to Shareholders and new investors on the same basis as ththe Placing and Open Offer in November 2008. The ordinary share offer is fully underwritten by HM Treasury on substantially the same fee basis as the Placing and Open Offer conducted in November 2008. There will be an excess application facility as in November pursuant to which Shareholders may apply for additional new shares in the ordinary share offer. The proceeds of the issue will be used to redeem the preference shares held by HM Treasury.

The preference shares will be redeemed at 101 per cent of their issue price. Dividends will continue to accrue on the preference shares until redemption. The redemption of the preference shares held by HM Treasury will remove the annual cost of the preference share dividends of £480 million and will improve the Group's cashflow and capital generation. In addition, upon redemption of the preference shares, the block on payment of ordinary dividends will be removed. However, it is not the Board's intention to pay a dividend on ordinary shares in 2009.

Further details and the terms and conditions of the ordinary share offer will be set out in the circular and prospectus, as applicable, the availability of which will be communicated to Shareholders in due course. IMPACT OF PREFERENCE SHARE REPLACEMENT AND B SHARE CONVERSION

If Shareholders do not claw back any entitlement to the ordinary shares to be issued pursuant to the preference share replacement, HM Treasury will own approximately 65 per cent of the ordinary shares. In addition, in the event of full conversion of the B Shares, if HM Treasury retained all the ordinary shares resulting from such conversion and assuming it still retained all its existing shareholding in Lloyds Banking Group plc, then HM Treasury's aggregate ordinary shareholding would be 77 per cent. HM Treasury may not exercise its option to convert the B Shares to the extent that by doing so it would hold more than 75 per cent of the ordinary shares in Lloyds Banking Group plc, although this limitation does not apply in the event of mandatory B Share conversion. In no circumstances will HM Treasury be able to exercise more than 75 per cent of the voting rights in Lloyds Banking Group plc.

HM Treasury has confirmed to the Board that its objective in increasing its potential holding of ordinary shares in the Group is to provide financial support. In the event that HM Treasury increases its ownership of the ordinary shares, it does not envisage any change to the constructive relationship it currently enjoys with the Board. CAPITAL RATIOS

Participation in the Scheme and the capital restructuring will result in a very significant boost to the Group's proforma 31 December 2008 core tier 1 capital ratio (as previously announced on 27 February 2009) by some 810 basis points, to approximately 14.5 per cent. The tier 1 capital ratio will be approximately 18.7 per cent and the total capital ratio will be approximately 20.5 per cent.

The significant increase in the Group's capital resources will come from an approximate £194 billion reduction in the Group's risk weighted assets and the issue of £15.6 billion of B Shares to HM Treasury and is stated after allowing for the deduction from tier 1 capital of 50 per cent of the unprovided first loss exposure in the Covered Assets, less relevant fair value adjustments. LENDING

Participation in the Scheme, together with the increased quality of capital arising from replacing the preference shares held by HM Treasury with ordinary shares, have enabled the Group to commit to increase lending for the twelve-month period ending 1 March 2010 to creditworthy borrowers by a total of £14 billion  £3 billion for mortgage lending and £11 billion for business lending. A further £14 billion is committed for the twelve month period thereafter. This additional lending will be subject to the Group's prevailing commercial terms and conditions (including pricing and risk assessment) and, in relation to mortgage lending, the Group's standard credit and other acceptance criteria.

This lending commitment is part of the Group's ongoing support for UK businesses and homeowners. The Group has pledged its support for various Government schemes designed to provide additional funding for small businesses. The Group has also published charters for its small business customers making a range of pledges to help firms through the downturn, including a pledge to reduce business rates in line with base rate. TERM

While it is intended that the Scheme will apply to the Covered Assets until their maturity, the Group's participation in the Scheme will be capable of termination by mutual agreement of the Group and HM Treasury. ONGOING MANAGEMENT OF THE COVERED ASSETS

Lloyds Banking Group will continue to manage all the Covered Assets in accordance with asset management requirements as outlined under the Scheme.

As the Scheme is intended to apply to losses arising before the Scheme comes into operation, the Group has today agreed with HM Treasury certain interim arrangements relating to the management of those assets and exposures likely to be part of the Scheme. CONDITIONS TO ACCESSION OF THE SCHEME

Implementation of the Scheme for the Group will be subject to further due diligence by HM Treasury and its advisers, documentation and satisfaction of applicable conditions (including the application criteria and asset eligibility criteria of the Scheme) and conditions precedent to accession to the Scheme, including regulatory, State Aid and shareholder approvals.